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Apr 02 2013

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How Singaporean Children Can Lead The Investment Pack


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Becoming a millionaire isn’t as hard as most people think. 

You have to control your spending, save intelligently, and ensure that your money gets invested as early as possible.

Warren Buffett, the world’s greatest investor, started investing when he was 11 years old.   Compound interest (which Einstein called the 8th wonder of the world) unleashes its wealth-building power over time.  The earlier an investor begins, the more wealth he or she will accumulate.

If you’re a Singaporean looking to give your children a head-start, don’t just talk about it. 

Get something started today.  I spoke with Roger Leng, of Fundsupermart, and learned that a young person (whose age would normally deem them ineligible for an investment account) could open a Beneficiary Account with their parent’s help. 

Parents can print and fill out the appropriate paperwork before mailing the completed hard copy to Fundsupermart.  Once started, Leng suggests that the application will take roughly one week to process.

So, what should you buy for your son or daughter?

Studies show that seeking funds based on their past performance is a poor strategy.  The most reliable measurement of future return is the expense ratio of the funds selected.  The lower the costs, the higher the probability of future returns.  I explained this thoroughly in my international bestseller, Millionaire Teacher:  The Nine Rules of Wealth You Should Have Learned in School.

Diversify

Rather than looking for a fund in the next hot sector (you really think you have a crystal ball?) it’s better to diversify your assets across many sectors and geographic regions.  This way, if there’s an investment bonanza taking place anywhere, you’ll guarantee to have some exposure to it.

For a diversified, global stock market portfolio, you could simply buy two funds:  a global fund, and a Singapore fund.  I’ve described them as “Investment 1″ and “Investment 2″ below:

Investment #1

The Infinity Global Stock Index gives investors exposure to the world’s stock markets.  Its annual expense ratio is 0.97 percent.  With this index, you’ll own U.S. stocks, European stocks, Asian stocks, Australian stocks…and more.

Fundsupermart provides access to actively managed unit trusts that have both underperformed and outperformed this index.  But they all cost more than 0.97 percent each year.  As such, academics would suggest that the lowest cost fund has the highest odds of performing in the top quartile, going forward.  Past results themselves, are not good indicators of future success.  And this is the lowest cost (non ETF) global equity fund available in Singapore.

Why Don’t Your Children Need Bonds?

While your children are young, they won’t necessarily need bond market exposure.  Bonds pay low levels of interest; as a result, they don’t perform as well (long term) as stocks.  However, it would be prudent to have exposure to Singaporean stocks, as well as the global market. 

Investment #2

Because a Singaporean stock index doesn’t exist–unless you’re buying an exchange traded fund through a broker—the next best thing for your child would be a low cost, actively managed unit trust. 

Again, relying more on the underlying cost of the fund is a better predictor of future profits than relying on their respective, historical returns.  You could choose one of the three low cost Singapore stock market funds listed below:

Funds

Annual Expense Ratios

Five Year Average Returns

DWS Singapore Equity

1.25%

4.05%

Nikko AM Shenton HIF Singapore Dividend Equity

1.51%

6.26%

United Singapore Growth Fund

1.26%

4.64%

Keep in mind that most investors buy the funds with the highest historical results.  This generally turns out to be a mistake.  As previously mentioned, past returns aren’t necessarily indicative of strong future results, and the single most reliable indicator is the expense ratio:  the lower the ratio, the higher the probability of future returns.

You may wish to split your child’s money evenly between the global index and one of the actively managed trusts above.  Or you may be more comfortable emphasizing the Singapore market, putting ¾ of the money with the local fund, and ¼ of the proceeds in the world index.  You will need to initially invest at least $1000 into each fund, to get them started.  After that, subsequent investments as low as $100 can be made.

Regardless of what you choose, stick to your original allocation. 

Most people are poor investors because they put fresh money into funds or geographic regions that are rising.  Their tendency, unfortunately, is to buy high, rather than buying low.  If you stick to your goal allocation, you won’t have to worry about making this mistake. 

For example, if you split your money evenly between Singaporean and global stocks, and the Singapore market plunges, add fresh money to that market the next time you invest.  If the world market plunges and the Singapore market rises, add money to the world market.  Don’t chase past winners.  And maintain your goal allocation over time.  Doing so will ensure (as Warren Buffett says) that you’ll be greedy when others are fearful and fearful when others are greedy.

When your children turn twenty-one, they can be eligible to open a brokerage account and purchase exchange traded funds instead.  These are cheaper options still, giving them even higher odds of investment profits.

By investing early, your children won’t have to save as much as their friends (over their lifetime) but they’ll still likely end up with much more money.

There’s a reason Einstein called compound interest the most powerful force on earth.

Open your child’s account today.

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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2013/04/how-singaporean-children-can-lead-the-investment-pack/

25 comments

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  1. avatar
    Rahim

    Another great post, Andrew. The compounding effect is certainly your best friend when it comes to long-term saving and investing.

    I'm trying to take advantage of compounding, but I have a silly question. I'm 33 and have 2 accounts with index mutual funds: 1) retirement (RRSP), and 2) investment (TFSA). Am I losing out on the compounding effect by having 2 separate accounts vs. a consolidated one that compounds with a larger amount? Or is the discrepancy minimal? Ideally I would have 1 account but I'm keeping the investment/TFSA account so that I can potentially withdraw money before retirement. I'm assuming most people invest this way (long-term vs. shorter term), but I'm wondering if this is to their disadvantage in terms of compounding.

    Thanks, as always,

    –Rahim

    1. avatar
      Andrew Hallam

      Hi Rahim,

      There's no disadvantage to what you're doing. An analogical question would be this: Are you missing out on compounding when a single portfolio is comprised of 3 ETFSs versus just 1 ETF? Not to worry Rahim, you have set up two very intelligent accounts for different purposes (slightly) and together, they will compound with the same power, as if they were one.

      Cheers,

      Andrew

  2. avatar
    Blues

    Hi Andrew

    I agreed with your suggestions. However, I think it will be a better option for the parents to invest in ETF and hold in trust on behalf of the child instead of going with the higher cost unit trust option.

    Cheers

    1. avatar
      Andrew Hallam

      Agreed, but much easier said than done, in this country.

      1. avatar
        Blues

        Ok Andrew, I get what you meant now. I would think the parents can also buy etf in their own name and hold on the child behalf.

  3. avatar
    derek

    Hi Andrew

    Your advice on compounding is true but I wonder how compounding works in your example. If I buy a fund worth $1000, 5 years later if it is worth $1200, I gain $200. However, if it drops to $800, I would have lost $200. This is purely capital gain/loss based on the performance of the fund. I fail to see the effects of compounding. May be I am missing something here.

    Thanks.

    Derek

    1. avatar
      Andrew Hallam

      Derek,

      Investment performances fluctuate. The U.S. market, for example, has averaged (with dividends reinvested) roughly 9.5 percent per year over the past 90 years. This doesn't mean that there weren't periods where it lost 40% in a given year. These losses (which aren't really "losses" unless you sell) are offset by periods where it gained big. The global markets, for example, dropped about 40% in 2008/2009, but gained roughly 130 percent since their low. These fluctuations, however, frighten people. As a result, many don't earn the compounding returns they should, because they often seal in losses by selling low, and then buying high after the markets have recovered.

      And when markets fall, the reinvestment of dividends becomes even more powerful, as dividends purchase shares at lower costs.

      Note the link to the U.S. market here: http://quotes.morningstar.com/fund/vtsmx/f?t=vtsm

      You can see that the markets dropped and rose during the last decade. But it still turned $10,000 into more than $22,000. If you want to know what this equates to, as a compounding return, you could play with the compound interest calculator at http://www.moneychimp.com.

      You'll see that growth from $10,000 to north of $22,000 equated to an 8.4% compounding annual return. It doesn't come like a smooth ride, but over a 30 year period (as history has indicated) global markets have averaged a compounded return between 8-10% per year.

      Cheers,

      Andrew

  4. avatar
    Peony

    i am a Singaporean. i do understand your principle about allocating between the global mkt index and sg index. But how do i manage the risk of the USD on my purchases of the global mkt indices? USD has weakened greatly against SGD from a high of 1.6 to now only 1.25. how do we manage this exchange risk ?

  5. avatar
    Peony

    sorry, can i ask also, why do you recommend the above sg stock market funds, and not directly just invest in the 2 ETFs through the broker?

    1. avatar
      Andrew Hallam

      Hi Peony,

      The above example provides a simple way for parents to get their kids investing early through beneficiary accounts. Through a broker, such purchases in Singapore, on behalf of children, are much tougher to make. There are a greater number of regulations in Singapore for ETF accounts. That said, when the child is older, it would be the best option.

      As for the USD exposure, if you are investing in a world index, you will take roughly a 40% US dollar component within that index because the U.S. global capitalization is roughly 40% of global cap. But if you buy a world index that excludes the U.S. (which you could do) you won't take USD currency exposure risk, but potentially take higher risk by not having exposure to 40% of the world's capital markets.

      Cheers,

      Andrew

  6. avatar
    John Er

    HI Andrew,

    Greeting, I from Malaysia, 36 years old and i have extremely intend invest in ETF market, but how do i start, where can i open account for ETF in Malaysia??

    Can I open account in Vanguard if I from Malaysia?? which ETF suitable for me to do a investment.

    Please help and hope can hear you soon

    Thank You

    1. avatar
      Andrew Hallam

      Hi John,

      You could open an account with DBS Vickers, in Singapore. Many non Singaporean residents have done this. You would call the bank and ask to set up a brokerage account. Don't take no for an answer. Sometimes, you may find a representative who doesn't think it's possible, and they might try to tell you otherwise. But call back. It's done all the time. Once the account is open, you could transfer your money to Singapore and start building an account with ETFs.

      Cheers,

      Andrew

  7. avatar
    Ajay Deshpande

    Hello Andrew,

    I was reading your article on buying Index funds and bonds , based on the age allocation rule you follow.

    How do you know when to enter the market to purchase a Index fund or Bond index ?

    Or do you follow a rule of Buy when everyone sells and Sell when everyone buys ?

    I needed your advice on building a portfolio for retirement based on Index funds and how one should manage them over a period of time.

    Thanks in advance for your advice.

    AKD

    1. avatar
      Andrew Hallam

      Hi Ajay,

      You should start building a diversified portfolio as soon as you have the money. I don't believe in market timing, but I do believe in maximizing your time in the stock and bond markets.

      Cheers,

      Andrew

  8. avatar
    Joe

    Hi Andrew! Another great post! I get that a child doesn't need bonds, but what if a 50y.o. Singaporean adult was investing? What portfolio would you recommend? I'm thinking (after reading your blog):

    25% DWS Singapore Equity

    25% VT

    50% ISHG

    What do you think? She has a big lump (about 125K) sum to invest.

    Cheers! Joe

  9. avatar
    Joe

    Never mind andrew, just found your other post that exactly answers my question!: http://andrewhallam.com/2010/10/singaporeans-inve

  10. avatar
    Brendan

    Hi Andrew,

    Firstly I'd just like to say thanks for sharing your knowledge, and writing a great book. Just finished it, and it's given me the (much needed!) inspiration to take control of my finances.

    Firstly, I've just sent off an application for for my a Beneficiary Account for my 20 month old son . Get 'em started early eh!? However one minor question is why this is better than just a separate index fund … considering the fees involved. I noted in previous posts (and the book), that you didn't really recommend Fundsupermart because of the fees incurred.

    Secondly (and I know this has been discussed in great detail already), I have a Vista fund *sigh*.

    Quickly … I've got $36k paid in since 2009, but stopped payments after 18 months. The redemption amount I've been given is approx $5k.

    I am torn between cutting my losses, or continuing to invest the bare minimum for the remaining 20 years. I'm sure it will grow to some extent …. but I'm struggling to determine whether re-investing the redemption amount into my index fund would yield better returns in the long run.

    Thanks again for your invaluable insights.

    1. avatar
      Andrew Hallam

      Hi Brendan,

      I'm glad you liked the book. To clarify your question, what do you mean by this:

      "one minor question is why this is better than just a separate index fund … considering the fees involved."

      Your child, if living in Singapore, has few custodial options for their own account. Yes, fundsupermart fees are high, but the options are otherwise limited. Could you just put an ETF in your personal account and assume that it's your child's, and give them the proceeds at a certain point? I suppose you could do that.

      As for the insurance linked investment plan you're in, you should do the long term math. My guess is this: selling and taking the hit will be more beneficial over the long term. But it will also be like a kick to the groin. Your personal feelings about it will likely play into the equation as well. It would hurt to lose so much money, short term.

      1. avatar
        Brendan

        Yes, to clarify I did just wonder if there was any specific benefit to using funsupermarket as opposed to an EFT in my account, but ultimately for his benefit.

        As for Vista … I'll have to sit down and consider the long term math. Using your analogy … I guess the pain in my groin would ease over time!

        Thanks for your help!!

        1. avatar
          Andrew Hallam

          If you have the account up and running, Brendan, buying that ETF would be a good option. I have friends that have done the same for their kids, with the world stock market ETF (VT). It provides nice global equity diversification at a very low price.

          Cheers,

          Andrew

          1. avatar
            Brendan

            Great … thanks again!

  11. avatar
    Prats

    Hi Andrew,my kids are 8 year old and i am in a dilemma to decide weather to buy education insurance plan (avaiable from manulife,ntuc etc)for my twins or buy mutual funds in singapore as I am singapore PR.
    Greatly appreciate if you could advice me on this as my intention is to save for their university education.If your advice is to go for mutual fund kindly provide detailed info for me to proceed.
    Thanks and regards
    PratasS

    1. avatar
      Andrew Hallam

      Hi Prats,

      I can only tell you that most people I know invest educational money for their children. They ensure that the money is diversified, balanced between stocks and bonds, and low cost. The article above has some suggestions. And while your child gets closer to their university date, you may want to increase the fixed income portion (ie. cash or bonds) to ensure that they aren’t exposed to the stock market’s gyrations when you may need the money.

  12. avatar
    stephanie

    Hi Andrew,

    V grateful to u for sharing this wonderful book. V glad to learn that I can generate passive income and grow my wealth thru ETF.

    We have realised losses in stocks n ILP as we purchased at the peak around 2007 and 2008.

    V sad. Hard earned $ all gone !

    We are in mid 30s.

    Shd we treat CPF (amount that I can invest) and Cash as a whole portfolio ?

    Or should we not invest using CPF as you have mentioned before and bond is also currently 2+ % ( abt the same as CPF interest rate). But CPF can only be use for buying property or retirement.

    By the way, CPF can only buy A35 and ES3.

    Scenario 1
    =========
    CPF 40k
    Cash $0

    Scenario 2
    =========
    CPF 10k
    Cash 70k

    If using this percentage

    A35- 35%
    ES3- 25%
    VT- 20%
    VEA- 20%

    For both scenarios , Is it advisable to use CPF to buy ES3 ?

    Since we can’t rebalance for CPF and it can only be used for property purchases and retirement.

    For scenario 1, we save till 3k to invest in the above percentage and rebalance it accordingly. OK ?

    For scenario 2, Use CPF to buy ES3 which is ard 12.5% and the other 12.5% use cash to buy.

    As for the remaining ETF, use cash to buy.

    For rebalancing, just use Cash to do it. OK ?

    Do you advise yearly rebalancing for this 2 scenarios ?

    When do we need to do monthly rebalancing ?

    I have a baby that is 10 months old.

    Great to knw that i can start him soon.

    Thanks a lot.

    Hope to hear from u soon.

  13. avatar
    PJ

    Hi Andrew
    Child Funds

    I am British expat S.E. Asian based in Thailand and no plans to return to UK, I have Singapore DBS Vickers trading account (only just opened as had some problems, another story) and US Schwab account (will be changing to DBS Vickers once set up due to inheritance tax concerns- following posts on transfers intently)

    I am searching for an investment plan/ ETF’s such as TOTAL stock market fund or similar for my niece (2 years old Australian) and (own future children) to pay or help pay for school/ UNI fees, could you recommend any for lump sum investment starting at $25,000 USD and intermittent top up for 15 years or so that I could put in the childs / Joint names (partners & mine plus childs) and that would be maintained upon my demise potentially without further top up.

    I have read up on “school funds” but remain concerned regarding management fees and potential difficulties in power of attorney, any inheritance tax implications considering I was the primary investor etc. Also considering my demise, what is the normal process if a fund management company decides to close a certain fund, would they just sell the shares and market rate and credit yours/ beneficiary account.

    All too complicated for me, just considering best ways to limit paperwork / involvement for my partner and ensure some financial security at a given time in the future for immediate family.

    Any thoughts from yourself or posters would be welcomed

    Cheers
    PJ

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